New parametric flood index-insurance pilot launched in Bangladesh

A new pilot scheme offering flood insurance to residents of a region of Bangladesh using a parametric product based on flood depths has been launched by a group of organisations including Oxfam and Swiss Re. The product aims to use alternative risk transfer techniques to protect poor residents of river basin areas of the country.
The product that is being piloted is parametric in nature and offers index-based flood insurance which will feature a rapid payout to policyholders should a flood event strike. The launch hopes to cover 1661 poor families of 14 villages located in the Char areas of Sirajganj district, Bangladesh to start with. When a catastrophic flood event strikes which reaches the payout parameters trigger a payout of BDT 8000 per household will be made. Mobile payment will be introduced soon in order to facilitate even faster payouts.

“Floodwater that used to create fertile ground for agriculture crops has resulted in catastrophic consequences in Bangladesh now. Through this flood index insurance scheme, Swiss Re supports the insurance sector with product structuring, pricing and underwriting, as well as reinsuring the risks. The insurance scheme will help to mitigate the fiscal impact of the flooding to the villages, and strengthen the resilience of the economy,” said Harini Kannan, Head of Agriculture Reinsurance South West Asia from Swiss Re, the reinsurance partner for this pilot scheme.

A flood hazard model has been constructed for the project, but it is only focused on flood water depths and not resulting losses as there is a lack of flood loss data for the region. This makes provision of flood insurance difficult as it can be hard to price, so this project is pricing its index-based policy premiums using this hazard model.

The model will also be used to denote whether a payout is required after a catastrophic flood event occurs. It will calculate payouts based on pre-defined formula eliminating the requirement for physical monitoring of flood depths. By using model generated flood data for payout calculation, rather than trying to install new gauges, it makes the product scalable and free from human error and tampering, according to the product sheets.

The parametric flood insurance product will payout based on the number ‘flood days’ a region suffers. A ‘flood day’ is defined as a day when the average water level of the reference area is higher than the corresponding water level trigger. Payouts will begin after 11 continuous flood days or more.

This is another example of microinsurance products using alternative risk transfer techniques, such as indices, models and parametric triggers, in order to bring catastrophe insurance protection to some of the world’s poorest and most vulnerable people.